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No. 06-94 In The Supreme Court of the United States ______________ FULLER-AUSTIN INSULATION COMPANY, f/b/o FULLER-AUSTIN ASBESTOS SETTLEMENT TRUST, Petitioner, v. HIGHLANDS INSURANCE COMPANY, et al., Respondents. ______________ On Petition For A Writ of Certiorari To The California Court Of Appeal, Second Appellate District, Division Two ______________ BRIEF OF AMICI CURIAE THE BABCOCK & WILCOX COMPANY ASBESTOS PI TRUST, THE CELOTEX ASBESTOS SETTLEMENT TRUST, THE PLIBRICO 524(g) ASBESTOS TRUST, THE WESTERN ASBESTOS SETTLEMENT TRUST, AND THE COMBUSTION ENGINEERING 524(g) ASBESTOS PI TRUST IN SUPPORT OF PETITIONERS ______________ J OHN P. S ANDE , III J ONES V ARGAS 100 W EST L IBERTY S TREET T WELFTH F LOOR R ENO , N EVADA 80501 (775) 786-5000 C OUNSEL FOR T HE W ESTERN A SBESTOS S ETTLEMENT T RUST M ARK A. P ACKMAN (C OUNSEL OF R ECORD ) J ONATHAN M. C OHEN C HRISTINE P. H SU F ILOMENA D’E LIA G ILBERT H EINTZ & R ANDOLPH LLP 1100 New York Avenue
NW
Suite 700
Washington, DC 20005
(202) 772-2200 C OUNSEL FOR ALL OTHER A MICI C URIAE STATEMENT OF INTEREST The Babcock & Wilcox Company Asbestos PI Trust, The Celotex Asbestos Settlement Trust, the Plibrico 524(g)
Asbestos Trust, the Western Asbestos Settlement Trust, and
the Combustion Engineering 524(g) Asbestos PI Trust
(collectively, “Amici”) were established under the United
States Bankruptcy Code for the benefit of those injured by
asbestos-containing materials made, sold, or installed by the
bankrupt predecessors of Amici. As discussed more fully
below, Amici were born of the same necessities as
Petitioner’s trust, namely, to discharge debilitating asbestos
liabilities while ensuring fair compensation to all injured
claimants. Thus, Amici have a strong interest in the outcome
of the petition for certiorari filed by Petitioner Fuller-Austin
Insulation Company (“Fuller-Austin”). 1 BACKGROUND The Asbestos Problem Many attempts have been made over the past twenty- five years to resolve what this Court has called the
“elephantine mass” of asbestos cases clogging the tort 1 As required by Rule 37.6 of this Court, counsel for Amici state that they authored this brief in its entirety and that no party or parties other than
Amici made any monetary contribution to the preparation or submission
of this brief. As required by Rule 37.2, consent to the filing of this brief
has been obtained from all parties. The consents of the following parties
were obtained by email: Stonewall Insurance Company, Certain
Underwriters at Lloyd’s London and Certain London Market Insurance
Companies, Brittany Insurance Company, Compagnie Europeene, and
International Insurance Company. Copies of these e-mails are being filed
with this brief. The consent of the remaining parties was obtained orally.
Counsel for Amici will file a letter memorializing written consent from
the remaining parties. 3 system today. Ortiz v. Fibreboard Corp., 527 U.S. 815, 821
(1999). Millions of tort claims have been filed, alleging 2 billions of dollars of personal injury and/or property damage
from exposure to asbestos-containing materials. 2 The overwhelming burden of such claims, in terms of both
litigation costs and tort liabilities, has so far driven more than
seventy companies into bankruptcy, including Amici’s
predecessors and Fuller-Austin. 3 Crafting a long-term solution to the asbestos crisis is challenging not merely because of the sheer number of
claimants and defendants, but because of the long latency
period for asbestos injuries, which frequently do not manifest
themselves until decades after exposure. See Amchem
Prods. v. Windsor, 521 U.S. 591, 598 (1997). To pass
muster, any resolution of asbestos liabilities must address
both present and future claimants (those who have not yet
manifested a disease and filed a claim). See id. at 610-11,
626-28 (rejecting global settlement of asbestos claims on
grounds that it failed to protect rights of claimants who had
not yet manifested a disease). In light of the decisions in
Amchem and Ortiz, which likewise rejected a class
settlement of asbestos claims for failing to respect the rights
of future claimants, the bankruptcy process is now the only
allowable way for companies to discharge future asbestos 2 For example, shortly before The Babcock & Wilcox Company filed for bankruptcy protection, the number of asbestos-related claims filed
against it was over 400,000. In re Babcock & Wilcox Co., No. 00-10992,
at 5, 37 (Bankr. E.D. La. Dec. 28, 2005), available at
http://www.laeb.uscourts.gov/Opinions/pdf/00-10992-7027.pdf. During
the Celotex Corporation’s bankruptcy, approximately 737,000 asbestos-
related bodily injury proofs of claim were filed against the company,
alleging more than $200 billion in damages. In re Celotex Corp., 204
B.R. 586, 604 (Bankr. M.D. Fla. 1996). 3 See RAND Institute for Civil Justice, Asbestos Litigation, at 109 (2005), available at h t t p : / / w w w . r a n d . o r g / p u b s / m o n o g r a p h s / 2 0 0 5 / RAND_MG162.pdf. 3 liabilities. Indeed, Congress enacted section 524(g) of the
Bankruptcy Code, 11 U.S.C. § 524(g), to lay out the
blueprint for accomplishing this goal, and insurance
proceeds are an important part of that plan. Section 524(g) Amici were created pursuant to bankruptcy reorganization plans under section 524(g), the same
provision upon which Fuller-Austin relied as authority for its
reorganization plan. As required by section 524(g), these
plans provide for the resolution of asbestos-related claims
against the debtors and the establishment of Amici as the
vehicles to pay these claims for the exclusive benefit of
asbestos claimants. See, e.g., In re Celotex Corp., 204 B.R.
at 602, 604. To this end, the plans transfer various of the
debtors’ assets to Amici, including, among other things, the
rights to the proceeds of the debtors’ insurance policies. See,
e.g., id. at 602-03. These policies typically require the
insurers to provide sweeping coverage for “all sums” that the
policyholders became obligated to pay as a result of, inter
alia, asbestos personal injuries. In exchange for these assets,
Amici’s predecessors are fully discharged from their
asbestos-related liabilities, which are transferred to Amici.
See, e.g., id. at 609-10. Amici then pay claimants pursuant to
criteria approved by the courts. See, e.g., id. at 610, 613. The non-insurance assets transferred to Amici cannot, by themselves, satisfy the billions of dollars in present and
future asbestos-related liabilities. 4 Accordingly, section 4 Indeed, several companies with asbestos liabilities have cited the importance of their insurance in opposing proposed federal legislation
that would require relinquishment of insurance coverage to a federally
run fund, along with cash payments, to resolve outstanding asbestos
liabilities. See S. 852: A Fair and Efficient System to Resolve Claims of
Victims for Bodily Injury Caused by Asbestos Exposure, and for Other (Continued …) 4 524(g) provides that trusts like Amici pay, in the first
instance, only a percentage of the full liabilities established
by each claimant (the “initial payment percentage”). 5 Paying each claimant less than the full amount of his claim ensures
that there will be adequate assets available for distribution to
future claimants. If and when additional assets become
available, e.g., if the Amici recover insurance proceeds from
previously recalcitrant insurers or the claims are fewer than
expected, the Amici increase the amount paid to claimants
(and pay additional amounts to those claimants who already
were paid). SUMMARY OF ARGUMENT According to the Court of Appeal, once a bankrupt policyholder has received a discharge pursuant to a plan of
reorganization, an insurer’s obligation is limited to the initial
payment percentage, i.e., the amount that trust can initially
afford to pay from the assets it has received from the
bankrupt policyholder. Fuller-Austin Insulation Co., 38 Cal.
Rptr. 3d at 747, 749. This limitation produces perverse
results. Under section 524(e) of the Bankruptcy Code, 11 U.S.C. § 524(e), the discharge of a debtor from its debt does
(… Continued) Purposes, Hearings Before the S. Committee on the Judiciary, 109th
Cong. 47-48 (Apr. 26, 2005) (statement of Carol Morgan), available
at http://frwebgate.access.gpo.gov/cgi-bin/useftp.cgi?IPaddress=162.140.
64.128&filename=26841.wais&directory=/diskb/wais/data/109_senate_h
earings. 5 The Court of Appeal referred to the full amount of the liability as the “Allowed Liquidated Value,” or “ALV,” and to the amount actually paid
by the Fuller-Austin Trust as the “payment sum percentage.” See, e.g.,
Fuller-Austin Insulation Co. v. Highlands Ins. Co., 38 Cal. Rptr. 3d 716,
724 (Cal. Ct. App. 2006). 5 not relieve the obligation of any other entity (e.g., an insurer)
that may be liable for the debt. The insurers’ policies
similarly provide that the bankruptcy of the policyholder
shall not relieve the insurers of their policy obligations. Section 524(e) plainly prohibits an insurer from reducing its liabilities merely on the basis of its
policyholder’s bankruptcy and subsequent discharge. Under
the Court of Appeal’s decision, however, the liability of
insurers for the debts of their policyholders turns not on what
federal law requires in section 524(e) or on what the insurers
promised in their policies, but rather on the amount of non-
insurance assets transferred by the policyholder to the trust
under the plan of reorganization. Thus, if a bankrupt
policyholder had no assets other than insurance to transfer to
a trust, and the insurers denied coverage, the trust initially
would have no assets with which to pay claims and would
have to set the initial payment percentage at zero. Under the
Court of Appeal’s decision, the insurers could then argue
that, because the trust’s payment percentage was zero, they
would have no obligation to pay anything under their
policies. Even if the Trust had non-insurance assets and, for
example, could set the payment percentage at 10%, the
insurers could still argue under the Court of Appeal’s ruling
that their obligation was not for the amount of the debt to the
injured claimant, but rather for the reduced amount the trust
could afford to pay the claimant. By allowing insurers to limit their liabilities based on the happenstance of their policyholder’s bankruptcy and
subsequent discharge, the Court of Appeal has disregarded
not only Congress’s express direction in section 524(e), but
also well-established federal case law. See UNR Indus., Inc.
v. Cont’l Cas. Co., 942 F.2d 1101, 1105 (7th Cir. 1991)
(holding that insurer must pay the amount of the bankrupt
policyholder’s debt, and not merely what the successor trust
can afford to pay). 6 Thus, the Court of Appeal’s decision threatens to strip from existing trusts much of the value of the insurance
rights they received from their debtor-predecessors,
substantially reducing the amounts available for their
beneficiaries, while the insurers obtain a windfall. See id.;
West v. White (In re White), 73 B.R. 983, 985 (Bankr.
D.D.C. 1987). Moreover, the Court of Appeal’s decision
actually creates an incentive for insurers to deny coverage,
force their policyholders into bankruptcy and then argue that
their liability should be reduced to whatever the trust can
afford to pay. This surely was not Congress’s intent in
crafting section 524 as a tool for reorganization. For these reasons, and in view of the fact that this Court has not yet addressed these important federal
questions, certiorari should be granted. ARGUMENT A. Certiorari Should Be Granted Because the
Decision Below Directly Contravenes Section
524(e) of the United States Bankruptcy Code Section 524(e) of the Bankruptcy Code provides that “discharge of a debt of the debtor does not affect the liability
of any other entity on, or the property of any other entity for,
such debt.” 11 U.S.C. § 524(e). This provision embodies
the long-standing principle of “providing the debtor with a
‘fresh start’ but avoiding the grant of a windfall to third
parties.” In re Bd. of Dirs. of Hopewell Int’l Ins., Ltd., 281
B.R. 200, 210 (Bankr. S.D.N.Y. 2002); see also Lewis v.
Mfrs. Nat’l Bank of Detroit, 364 U.S. 603, 608-09 (1961)
(rejecting a construction that “would enrich unsecured
creditors at the expense of secured creditors, creating a 7 windfall merely by reason of the happenstance of
bankruptcy”). 6 The decision below, which did not consider section 524(e), would do precisely what section 524(e) is
designed to avoid: allow insurers to take advantage of their
policyholder’s bankruptcy and subsequent discharge to
reduce or eliminate their liability for the policyholder’s debt. According to the Court of Appeal, in the event of a policyholder’s insolvency, an insurer would be relieved of all
of its payment obligations that exceed the ability of the
policyholder or a successor trust to pay. As a result, if a trust
has no assets other than rights under disputed insurance
policies, and therefore initially cannot pay any amount to any
claimant, the insurer also would pay nothing under its
insurance policy – notwithstanding the fact that, outside of
the bankruptcy context, the insurer would have to pay
millions of dollars. This outcome is prohibited by section
524(e). In re Jet Fla. Sys., 883 F.2d at 975 (holding that the
“fresh start” offered by the Bankruptcy Code “is not intended
6 The earlier version of this provision, section 16 of the Bankruptcy Reform Act of 1898 (11 U.S.C. § 34, repealed Oct. 1, 1979), preserved
the liability of a party that “is a co-debtor with, or guarantor or in any
manner a surety for” the debtor. Section 524(e) removed any such
limitation, affirming “the liability of any other entity on” the debt of the
debtor (emphasis added). Even under the more restrictive language of
section 16, courts have maintained that the discharge of a debtor’s debts
“does not operate to release claims against parties liable with the
bankrupt, whether liquidated, as in the case of debts, or unliquidated, as
in the case of claims based on torts.” Johnson v. Bondurant, 359 P.2d
861, 865 (Kan. 1961). See also In re Bracy, 449 F. Supp. 70, 71 (D.
Mont. 1978) (deciding that “if an insurance company is as a matter of
state law liable to a plaintiff in a personal injury action, subsequent
discharge of the assured in bankruptcy does not alter the obligation of the
insurance company.”); In re Jet Fla. Sys., Inc., 883 F.2d 970, 975 (11th
Cir. 1989) (citing cases holding same under section 16). 8 to provide a method by which an insurer can escape its
obligations based simply on the financial misfortunes of the
insured.”); see also Green v. Welsh, 956 F.2d 30, 33 (2d Cir.
1992) (language of section 524 reveals that Congress sought
to free the debtor of his personal obligations while ensuring
that no one else reaps a similar benefit; thus, relief given to
debtor by section 524 does not extend to other parties). In deciding Jet Florida, the Eleventh Circuit repeatedly invoked section 524(e) as the basis for an
insurer’s obligation to answer for liabilities that a bankrupt
policyholder itself could not pay. 883 F.2d at 973-76. The
debtor’s inability to pay either the cost of defending the tort
action or the tort liability itself did not alter in any way the
insurer’s obligations under the insurance contract. Under the
Court of Appeal’s ruling, by contrast, the bankruptcy and
subsequent discharge of the policyholder would magically
(and improperly) transform the insurer’s obligation to cover
liabilities owed by the policyholder into an obligation to
cover only those liabilities that the policyholder or its
successor trust can afford to cover on its own. Indeed, the
Court of Appeal’s ruling actually creates an incentive for
insurers to deny coverage for liabilities arising from mass
torts, drive their policyholder into bankruptcy, and then rely
on the decision below to reduce their coverage obligations to
the amount the policyholder’s successor trust can afford to
pay. Ignoring this perverse incentive, the court below asserted that holding insurers responsible for liabilities
greater than what the debtor-policyholder could cover on its
own somehow would unfairly award the policyholder a
windfall. Fuller-Austin Insulation Co., 38 Cal. Rptr. 3d at
746. Nothing could be further from the truth. As the
Petition notes, Fuller-Austin’s claimants are initially paid
only a percentage of the value of their allowed claims in
order to comply with section 524(g)’s requirement that assets 9 be set aside to compensate future asbestos claimants. Pet. at
9. Thus, additional amounts paid into the trust by the
insurers do not provide the trust with a windfall. Rather,
such payments make it possible for the trust to increase
payments to the claimant beneficiaries of the trust. 7 The same is true for Amici. Moreover, to have insurers cover losses and liabilities that policyholders cannot afford to pay is the raison d’être of
insurance contracts. See, e.g., Harbor Ins. Co. v. Cont’l
Bank Corp., 922 F.2d 357, 368 (7th Cir. 1990) (the point of
insurance policies is to eliminate solvency risk). Section
524(e) merely codifies this goal in the bankruptcy context.
For Respondents to insist that their obligations are reduced
because Fuller-Austin has been discharged from its tort
liabilities and the successor trust cannot fully satisfy them
misconstrues the objectives of bankruptcy law. As the
Eleventh Circuit stated in Jet Florida, “[t]he reported cases
… underscore that the purpose of section 524 of the
Bankruptcy Code is to protect the debtor and not to shield
third parties such as insurers who may be liable on behalf of
the debtor.” 883 F.2d at 975. 8 Thus, under section 524(e), insurers remain fully liable on their policies notwithstanding the bankruptcy of
their policyholder and the subsequent discharge of its debts
to tort claimants. 7 Even if all insurance assets are recovered and distributed, it is highly unlikely that claimants of Petitioner and Amici ever will be compensated
in full. 8 Indeed, the court in Jet Florida went so far as to hold that, notwithstanding a debtor’s discharge in bankruptcy, a third party could
sue the debtor to establish its liability, in order to collect the debt from
the insurer. Jet Florida, 883 F.2d at 976. 10 Any other outcome would result in a
windfall to insurers, which receive
premiums as the quid pro quo for providing
insurance. Any other outcome would also
disadvantage both innocent, third-party,
personal-injury claimants and innocent
general creditors of any bankruptcy estate in
which there are assets available for
distribution to creditors, whose pro rata
share of those assets must necessarily
diminish by inclusion of a claim that could
be but is not paid by insurance. In re White, 73 B.R. at 985. Numerous courts have reached
the same conclusion. See, e.g., Green v. Welsh, 956 F.2d at
32; In re Catania, 94 B.R. 250, 251 (Bankr. D. Mass. 1989);
In re Mann, 58 B.R. 953, 956 (Bankr. W.D. Va. 1986); In re
McGraw, 18 B.R. 140, 143 (Bankr. W.D. Wis. 1982); In re
Honosky, 6 B.R. 667, 670 (Bankr. S.D. W. Va. 1980). Given the well-settled rulings by state and federal courts alike reached under section 524(e) and its predecessor,
the Court of Appeal’s ruling cannot stand. Allowing
Respondent-Insurers to reduce their obligations based on the
debtor’s bankruptcy and subsequent discharge is anathema to
the letter and spirit of the Bankruptcy Code and requires this
Court’s intervention. The Court of Appeal’s decision likewise conflicts with the Seventh Circuit’s decision in UNR Industries.
There, the insurer made the same argument that Respondents
make here – that the extent of its obligations “depends on
how much money the Trust actually pays to asbestos victims
with valid claims.” 942 F.2d at 1105. Unlike the Court of
Appeal, the Seventh Circuit rejected this argument,
reasoning that it 11 threatens to confer a windfall on [the
insurer] at the asbestos victim’s
expense. The reason for the potential
windfall is that UNR paid the Trust
only a portion of the asbestos victims’
actual damages in the bankruptcy
proceedings. This discounting of the
asbestos victims’ damages had
nothing to do with the merits of their
claims. The discounting merely
reflected the amount of UNR’s assets
that the asbestos victims could reach.
[The insurer] may profit greatly from
UNR’s bankruptcy if its obligations
are based on the arbitrarily discounted
amount that the asbestos victims
actually receive from the Trust. Id. This conflict between the Court of Appeal’s decision and
UNR Industries warrants the granting of the Petition. B. This Court Should Grant Review Because the
Court of Appeal’s Decision Would Eviscerate
Section 524(g) of the Bankruptcy Code As Petitioner’s brief ably asserts, the Court of Appeal’s decision impermissibly frustrates the purpose of
section 524(g), Congress’s carefully crafted mechanism for
handling asbestos-related tort claims against bankrupt
entities. It is well-settled that state law cannot be applied in
derogation of federal law. See, e.g., Perez v. Campbell, 402
U.S. 637, 649-51 (1971) (remanding matter for
determination whether state law “stands as an obstacle to the
accomplishment and execution of the full purposes and
objectives of Congress”) (citing Hines v. Davidowitz, 312
U.S. 52, 67 (1941) (affirming decree restraining state 12 officials from enforcing state law found to intrude on federal
scheme)). Because Petitioner’s arguments are equally
applicable to Amici, Amici adopt those arguments. CONCLUSION For the reasons stated above, as well as those set forth in the Petition, certiorari should be granted. Dated: August 21, 2006 Respectfully submitted, J OHN P. S ANDE , III J ONES V ARGAS 100 W EST L IBERTY S TREET T WELFTH F LOOR R ENO , N EVADA 80501 (775) 786-5000 Counsel for The Western
Asbestos Settlement Trust M ARK A. P ACKMAN (C OUNSEL OF R ECORD ) J ONATHAN M. C OHEN C HRISTINE P. H SU F ILOMENA D’E LIA G ILBERT H EINTZ & R ANDOLPH LLP 1100 New York Avenue, NW Suite 700
Washington, DC 20005 (202) 772-2200
Counsel for all other
Amici Curiae i TABLE OF CONTENTS Page STATEMENT OF INTEREST.............................................1 BACKGROUND .................................................................1
SUMMARY OF ARGUMENT............................................4 ARGUMENT.......................................................................6 A. Certiorari Should Be Granted Because the Decision Below Directly Contravenes Section 524(e) of the
United States Bankruptcy Code ................................ 6 B. This Court Should Grant Review Because
the Court of Appeal’s Decision Would Eviscerate
Section 524(g) of the Bankruptcy Code .................. 11 CONCLUSION.................................................................. 12 ii TABLE OF AUTHORITIES Page Cases Amchem Products v. Windsor, 521 U.S. 591 (1997) .............2
Fuller-Austin Insulation Co. v. Highlands Insurance Co., 38 Cal. Rptr. 3d 713 (Cal. Ct. App. 2006)..................... 4, 8 Green v. Welsh, 956 F.2d 30 (2d Cir. 1992) ................... 8, 10
Harbor v. Continental Bank Corp., 922 F.2d 357 (7th Cir. 1990) .................................................................9 Hines v. Davidowitz, 312 U.S. 52 (1941)............................ 11
In re Babcock & Wilcox Co., No. 00-10992 (Bankr. E.D. La. Dec. 28, 2005) ......................................2 In re Board of Directors of Hopewell International Insurance, Ltd., 281 B.R. 200 (Bankr. S.D.N.Y. 2002).....6 In re Bracy, 449 F. Supp. 70 (D. Mont. 1978) ......................7
In re Catania, 94 B.R. 250 (Bankr. D. Mass. 1989)............ 10
In re Celotex, 204 B.R. 586 (Bankr. M.D. Fla. 1996) ...... 2, 3
In re Honosky, 6 B.R. 667 (Bankr. S.D. W. Va. 1980)........ 10
In re Jet Florida Systems, Inc., 883 F.2d 970 (11th Cir. 1989)...........................................................7-10 In re Mann, 58 B.R. 953 (Bankr. W.D. Va. 1986) .............. 10
In re McGraw, 18 B.R. 140 (Bankr. W.D. Wis. 1982) ........ 10
Johnson v. Bondurant, 359 P.2d 861 (Kan. 1961).................7
Lewis v. Manufacturers National Bank of Detroit, 364 U.S. 603 (1961) ........................................................6 Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999)............... 1, 2
Perez v. Campbell, 402 U.S. 637 (1971)............................. 11
UNR Industries, Inc. v. Continental Casualty Co., 942 F.2d 1101 (7th Cir. 1991) ............................5-6, 10-11 West v. White (In re White), 73 B.R. 983 (Bankr. D.D.C. 1987) ................................................. 6, 10 iii Statutes 11 U.S.C. § 34 (repealed Oct. 1, 1979) .................................7
11 U.S.C. § 524(e) ...................................................... passim
11 U.S.C. § 524(g) ...................................................... passim Other Authorities RAND Institute for Civil Justice, Asbestos Litigation (2005) ..............................................................................2 S. 852: A Fair and Efficient System to Resolve Claims of Victims for Bodily Injury Caused by Asbestos
Exposure, and for Other Purposes, Hearings
Before the S. Committee on the Judiciary,
109th Cong. 47-48 (Apr. 26, 2005)...................................3

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